James River Coal Management Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 9.12 | About: JAMES RIVER (JRCCQ)

James River Coal (JRCC) Q2 2012 Earnings Call August 9, 2012 11:00 AM ET

Executives

Elizabeth M. Cook - Director of Investor Relations

Peter T. Socha - Chairman, Chief Executive Officer and President

Coy K. Lane - Chief Operating Officer and Senior Vice President

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Brian D. Gamble - Simmons & Company International, Research Division

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

David E. Beard - Iberia Capital Partners, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the James River Coal Company's Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Beth Cook, Director of Investor Relations. Ms. Cook, please begin.

Elizabeth M. Cook

Thanks, Janine. Thank you, and good morning. Welcome to James River Coal Company's Second Quarter Earnings Call. We released our earnings today, and our current release and investor presentation are posted on our website and were furnished to the SEC on Form 8-K. With me on the call today are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; and Sam Hopkins, Vice President and Chief Accounting Officer.

Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These forward-looking statements should be considered along with the risk factors that we note at the end of our press release as well as in our annual report on Form 10-K and other SEC filings.

Now I'll turn the call over to Peter Socha.

Peter T. Socha

Okay. Thank you, Beth. Good morning, everyone. Welcome to the call. You will notice that Joe Czul is not on the call today. Joe is off on a vacation with his wife, a very well-deserved vacation, and I hope he's having a drink right now with a little umbrella in it. September and October become very busy for us on the met side with travel. And also, Joe and I talked last week and with Alpha reporting yesterday, I thought most of the met market would be covered at that time.

We will go through the slide deck. It's a fairly normal slide deck. It's fairly short, should not take much time, so we'll hopefully have more time for your questions. It was a quiet quarter. I mean quite honestly, from an operations and from a financial and from a sales and marketing standpoint, it's a fairly quiet quarter except for, obviously, except for Patriot filing bankruptcy right there at the beginning of July, which sort of we got stuck to them like Velcro. And so we had to answer a lot of questions from folks, but I think we have come through the worst of that.

We did -- on the bullets on the summary slide, there was a window of opportunity to fix the balance sheet and to get the balance sheet right for a commodity business. We hit that window last year. We did 2 things. We got liquidity on the balance sheet, which allows us to ride through cycles, and then we also got runway on the balance sheet where our next debt maturity is not due until December 1, 2015. And so I think a lot of people were thinking that we had to roll over debt sooner than that. We did. As of last year. We had a debt maturity due in May of 2012, but we took that out with the refinancing last year. So it's not a perfect balance sheet by any means, but it's a heck of a lot better than it's ever been before and we're pretty happy with it.

The second bullet, actually the first 2 bullets, you can tell the things that we are most focused on are liquidity and on CapEx and on maintaining, as best we can, maintaining the current structure that we have. We like it. We're comfortable with it, so we're going to try to do that as much as we can. We did sell some coal, and we priced some coal this quarter. Things are not totally dead out there. The met market has certainly had some softness recently, but the thermal market appears to be coming back around a little bit. As I said in the press release and as I said in the slide, it's coming off of a very low base, so we're seeing improvement off of a low base.

C.K. is going to talk in just a minute about the permits. That's a big deal. That's a very big deal. And a couple other cases on those permits, we were working on them for almost 5 years. So for our guys to be able to work with the agencies and to get those done, we're very happy with them and I know they feel a great sense of relief.

And lastly, we are confirming our guidance that's on the street right now, the current guidance. And the important word there is current because the CapEx, we did withdraw back in May appropriately so, and we're looking at that on a constant basis today. C.K. and his guys and Sam and our financial group are looking at it constantly. So we felt like it was appropriate just to keep it withdrawn.

And with that, I will turn it to C.K.

Coy K. Lane

Okay. Thanks, Peter. We are -- we did get 5 new surface mine permits as Peter had mentioned, and we're very pleased with those. At Triad, we received 2 permits in the quarter. At Freelandville, a 4.2 million-ton permit that will extend our surface mine there and help lower our costs. At Log Creek, a 5.8 million-ton permit that originally, the reserves were planned to be mined underground. This will allow us to mine them by surface methods and will also allow us to pick up additional reserves in 2 other seams, the 5B and 6C.

At Hampden, we received a 1.9 million-ton permit called Canebrake. This will be a combination of met and steam and should be a lower-cost permit. It extends our existing Pete Branch surface mine. At coal services, we received a Wolfpen permit. It's 2.9 million tons. This extends our Frasure Branch surface mine. It's one of our lower cost mines, and we're very pleased with that. And Stacy's Branch permit was 3.4 million tons. This permit is adjacent to our existing Buckeye surface mine. It's one of the few permits that had been issued in East Kentucky with valley fills. This was a 64-month permitting process. So a lot of iterations went through with this permit.

So that gives us a total of about 18.2 million tons that we were able to permit and a lot of work went into these permits, and our folks spent a lot of time on it. So we were pleased to get these permits.

In Central App, we continue to adjust our production to the soft market. We bottled several mines, some small surface mines, some contract underground mines. We have delayed startup of some of our existing company mines as other mines moved out, but we worked hard on shifting our production from a higher sulfur product to a lower sulfur product.

We reduced shifts and days at the operations. In the quarter, we took 3 idle days where we idled all our operations in CAPP. We also had some mines that worked a 4-day week, and we also have reduced a couple of mines from 2 shifts a day to 1 shift a day. We haven't had any deferrals in our utility contract shipments. We're pleased with that. And our cost at both our thermal and met mines are about what we've expected with the adjustments that we're making to the market.

We're also continuing some projects in CAPP. At our Bledsoe ABNER Branch mine, we developed an in-seam slope. That is in production. It just started at the beginning of August. We're hoping that will improve our cost and quality, and it's about 1.5 million tons we have to mine in that area. At Bell County in our Garmeada mine, we changed that mine to a super section. That's a 2 continuous miners on the section. We did that to increase production to match a contract that we have for that mine.

At our Hampden met mines, we've continued to upgrade the fleet with some new shuttle cars and continuous miners there, and we completed several surface mining reclamation projects that we've been working on this year. So that should help lower costs going forward, and we're hoping for somewhere in the neighborhood of $4.5 million in bond releases from those projects. At Blue Diamond, we started the development of a 3.5 million-ton reserve block that will replace one of our existing mines that will mine out. This mine will start in the first quarter of 2013 and will target the PCI market.

In the Midwest, same story. We've had most of the year, which is just matching our production to shipments. We'll continue to do that through the rest of the year. With the Freelandville permit, as we talked about before, that will help this surface mine get back to more normal mining sequence, and we should see improved cost of production there. We also started developing the Hurricane Creek surface mine. It's about a 600,000-ton block of reserves that we will move to in the third quarter when our Augusta surface mine mines out.

And with that, I'll turn it back to you, Peter

Peter T. Socha

Okay. Thanks, C.K. Turning to the met coal market, obviously, Alpha covered that in great detail yesterday both in their comments and on the Q&A, so I won't go into it too much today. I will say for what it's worth, my view is that it is a demand issue rather than an oversupply issue. I think that what we have found is that the Asian economies cannot exist as an island, that they felt like they could keep those economies up despite what's happening in the U.S. and despite what's happening in the Eurozone. And they've been successful at doing that up until recently, and now it's just a little bit more of a struggle.

We note that we're cautious through the end of the year. For about 18 months, we have thought that the 2 biggest drivers, for those of you who were with us in New York at the McCloskey conference a year ago, June, we talked about it a little bit. But the 2 biggest drivers in the global coal markets are the U.S. presidential election and how China manages their economy. I continue to believe that. I still think that very strongly. I would add to that -- today, I would add to that the Eurozone and what's going on there with their financial system. But the events that happened between now and December 31 of this year is, obviously, you have the election here in the U.S., but you also have a change in the leadership in China. And so I think that we are cautious until we get some more clarity on those things.

But we're close to it. Joe and his guys are doing a great job in managing through this market. Joe and I talked, I guess it was a week or 2 ago, and this is a market of singles. This is a market you're not hitting home runs, but you're picking and choosing your opportunities. And I think we're doing that well, and he and his team are doing that very well.

On the thermal coal market, that appears to be improving a little bit sooner than I had previously thought, to be perfectly honest with you. I think part of that is the utilities had stopped selling their excess coal. I think that may be the biggest factor. So we're seeing firming. We're seeing it from a lower base. I will say that 2013 on our contract table, 2013 is not quite as open as it appears right now. We are finalizing some things, and I think we'll have them final in the next period of weeks.

So I would remind a lot of you who are new to us that we focus -- when the market is improving the way it is right now, we focus more on quarters than we do on annual. So when people look at our sales table, they'll look at an annual number for 2013 to see how many tons we have sold, and we're more focused on the first quarter, first half. So it can be a little bit misleading, but it is something that we have talked about in the past.

Turning to natural gas. We had a slide in the last deck in May on natural gas, and we got a lot of calls and questions about it afterwards saying that we were surprisingly bullish on natural gas and people didn't quite understand why. And so I had -- we talked a little bit at that time about the 3 main factors. I mean, the 3 factors I came away with or I wanted to leave with you all was that we're drilling a lot fewer wells, which is widely publicized and everybody knows that. But the wells that they are drilling migrated from dry gas wells which are high production of gas to the liquids well. But they're still classified as a natural gas well, but it's a liquids well instead of a dry gas well. So production is down by somewhere between 60% and 70% off of normal.

So you have the migration from dry gas to liquids, and then you have the supernormal decline curves of the wells that were drilled back in 2009 and 2010. So production, it's -- right now it appears to be flatlined. It's in a state of transition from increasing rapidly to flatlining to rolling over. And when it rolls over, sometime in the next 6 to 9 months would be our best guess.

But the other issue on natural gas was the storage, was the overhang of storage, and that really impacted coal burn in March, April, May and June and to a certain extent, it still is but lesser so today. So one of the things that we were looking at was the surplus, and this was one that I walked around within my head for quite a while and finally, I sat down and put it on paper. You can see the May 3 date is the time line that we did the last call and we actually had our board call a week or 2 ahead of that.

So the trend line, by the time we got from March 31 to May 3, the trend line had already been broken. We had already established a new downward sloping trend line. Back at our board meeting in April, I told the board I thought we would see $3.50 gas by the end of the year, which considering gas was $2 at that time was kind of going out on a limb a little bit. But obviously, I don't feel quite so stupid today as I did back when gas was -- I think it was $2.06 at that time.

And then you could see where it is as of last week. We were 14.5% above normal. I think with today's number, if I understand correctly, today's number was 24 BCF injection. So that 14.5% above normal is now 13.5% above normal. If you want to know what we're projecting for the end of the year, which in this case would be mid-November, the line should be somewhere between 0 and 10%, say 5% between now and the end of the year or at the end of the year. So net-net, we should be going into the winter or into the withdrawal season of winter with natural gas storage numbers about normal, about normal.

For most of the summer, people were talking about gas-on-gas competition and about there being full storage by the end of injection fees and things like that. And they always qualified it by saying if injections are at normal levels, which was all well and good, but they were never at normal levels all year long, we were averaging 65% of normal. In the last few weeks, we've been averaging about 45% of normal. So it never quite gets down to full storage -- or gets up to full storage.

One thing we did do, if you look at the red circle on the left-hand side, we looked at, okay, when storage is between 0 and 10% above normal, what was the last time that happened and what were the average prices at that time? And you can see back in the winter of 2011, they ranged between 0 and 10%, and natural gas prices were $4.25. So we think we will see that sooner rather than later and I think -- I know, I was just talking to Andrew a little while ago, Alpha talked a little bit about thermal being late from 2013 and probably a little bit sooner than that on the recovery in the thermal market and the difference is natural gas. If your forecast is natural gas at $3.25 in February, you're going to have one time line on the recovery of the thermal market. If your forecast is $4 in the middle of February, you'll probably have a different time line. So if I can point to one area of distinction, that might be it.

Anyway, what I started to say was that I think we'll go into winter with normal storage. I think we'll start to see the declines happening that we talked about before from the last several years, less drilling activity and the migration to liquids and things like that. And then lastly, because of the warm winter last year, natural gas demand for R&C, which is residential and commercial, was down. Think, and it's been several weeks since I looked at it, but I think it was 821 BCF. It was down year-over-year.

So the surplus that we had going into the injection season this year of 880 or 925 BCF was almost directly attributable to the reduction in residential and commercial demand, and that was the weather. So if we have normal weather this winter, you'll have natural gas demand being up by 600 to 900 BCF and go into the year with a normal storage level. So we're still feeling fairly optimistic on the natural gas market, that it will clear first, that the impact on coal was that PRB will improve first in Illinois Basin, then Northern App, then Central App. But you have to start the process somewhere, and we're feeling better from that standpoint.

Long-winded answer on this slide or long-winded discussion on this slide. The guidance, as I mentioned, we haven't really changed anything. CapEx, we're going to continue to look at. The conferences we've got, we've got Sterne Agee in September up in Boston. It says summit. It's really one-on-ones in golf, if you want to know the truth. Johnson Rice, down with Bill Burns. Doctor Bill Burns down in New Orleans. I will be at the Sterne Agee. I believe I'll be at Johnson Rice with Bill. That is the week after the Mississippi-Ole Miss game. So I'll be down in the neighborhood, and I've got 2 children in college down in that area.

So at Dahlman Rose with Dan Scott, I'll be there for that. The rest of that week I should note, I'm going to be out marketing with Jim Rollyson in Boston, I think. I owe him one since I canceled out on his conference in New York and sent Sam. And then we will be at the UBS Conference in Boston. I'm not quite sure yet who will be there, but we will be attending that.

And our Q3 report will be in November 7 or 8. You'll note that those are the days after the election, the Wednesday after the election or the Thursday after the election. And so we'll have that uncertainty that will be removed, and we'll be having election reaction.

And with that, Janine, we are happy to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Jim Rollyson of Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

I know you reaffirmed the guidance but kind of wanted to go through a couple of things on that or implications from that I guess. On the Midwest, if you get to your, say, the low end of your annual volume guidance range, it implies second half deliveries are going to be up about 1/3 of what you did for the first half. Is that something that you're thinking as doable based on kind of customer conversations at this point?

Peter T. Socha

C.K., you want to take that?

Coy K. Lane

We've had several customers that have deferred shipments so far this year just from 1 quarter to the next. Right now, all the customers are saying they will take the tons, so we should see some increased shipments. One of the big issues we faced out there is, of course, it's been a warm weather, and the weather and the burn. But with the new Interstate Highway going through there, that's taking a lot of the trucks that would normally truck coal to some of our utilities and working on the new highway. So we struggled with trucks, both from us and our customers. So we're hoping that situation improves. So right now we're optimistic that we'll get to ship all those tons.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

And I guess on the cost front, with volumes picking up this quarter, your costs came down nicely there, I think basically right on the middle of the range you have for the year. So if volumes do in fact pick up second half, we should expect costs to kind of hang out in that mid to high 30s number, is that fair?

Coy K. Lane

I think we'll see costs stay about where they're at, maybe improve just a little bit going forward.

Peter T. Socha

Those guys -- you're right, Rolly. Those guys have done a great job of managing their costs. In a lower volume environment, they have done a great job, and I meant to say that in my first slide.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Glad I could help you out. On the CAPP side, your -- same thing on the volume guidance implies a pickup in thermal, stoker, PCI in the second half and a step down on the met side at least relative to 2Q. Is that probably accurate?

Peter T. Socha

I'm going to hedge big time on this because the met market has really just softened up here in the last several weeks, and most of our indications on met will come in September and early October.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Right. I mean, I guess implying a lower second half makes sense given what your period looked [ph]?

Peter T. Socha

Yes. I don't want to get too far out over my skis on what's happening in the met market, particularly without Joe on the call because he'll call me up and chew me up.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Understood. Just from a cash burn perspective, I think you've burned about $5 million this quarter, still in great shape liquidity wise. I know you're not giving CapEx guidance, but how do you think about your level of cash burn in the second half of the year?

Peter T. Socha

I mean we're looking at CapEx. Obviously, the liquidity or the cash that we have today, that's our golden child. And so we look at CapEx and we look at what the production forecasts are. I think C.K., you and Sam are having a call with the guys tomorrow?

Coy K. Lane

Yes.

Peter T. Socha

If I understand Sam correctly? So it's something we're looking at constantly. We've never given out sort of cash burn or cash generation guidance. But I can tell you, I mean, at least through the 6 months of the year, you can tell it's something we focus on. I mean, we've demonstrated that, that it's something we're very sensitive to and very in tune with.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Okay. And the last one, you've not shied away from politics in the past. So what's your prognostication for handicapping the election in November?

Peter T. Socha

Do you want a short answer or a long answer?

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Either one, detail is good.

Peter T. Socha

Short answer is I think Romney wins by a field goal. Long answer is I think if you look at the states -- I heard something last week. This was kind of interesting. I mean, everyone's looking at the independent voters, and the best predictor on presidential elections is right track, wrong track. Always. Always, always, that's the predictor. With independent voters, the right track right now is 11%. That's incredible when you think about it. It's 11% right track on independent voters. I think the states that will surprise will be Pennsylvania, will be Iowa and will be Oregon. I think in the case of Pennsylvania, President Obama won that state by 600,000 votes in '08. He's pouring an enormous amount of money into the state, and I'm not sure he wins it. I think the key is the 4 counties around Philadelphia where -- Delaware, Chester, Bucks and Montgomery. I think Mitt Romney is acceptable in those areas. I think the margin of victory for president will go down in Philadelphia and the rest of the state. If you look at the 2010 elections, there's 67 counties and cities in Pennsylvania, Governor Corbett -- current governor Corbett won 64 out of 67. So that state has really, really gone red recently, big Catholic state, big Jewish state, big Polish state. If you remember, Governor Romney in Poland a week or 2 ago, Lech Walesa just about hugged the guy. Iowa, Iowa last time, I can't remember what the margin of victory was, but John McCain was violently against ethanol subsidy. I mean, really, really against ethanol subsidy. That's a fiscally conservative state. It's a socially liberal state but fiscally conservative. They hate debt. They hate deficit. So I think Governor Romney picks up that. Oregon, I don't know. I can't tell you on Oregon, but I just have a -- I have a hunch that Oregon is going to go for Governor Romney. Nevada, I still go back to Nevada. I think it was when I was at Brian Gamble's conference there a couple of years ago when I was riding in the cab driving to the hotel. And this cab driver was just teeing off on President Obama, and it was an African-American cab driver. He was absolutely teeing off on Obama and on all that he had done that was harmful to the Las Vegas community, and I've got to believe some of that is still left. I think Florida where you guys are -- not you, but where your company is based, I think last I heard he -- well, not last I heard, he did win by 200,000 votes. President Obama won Florida by 200,000. Last I heard, there were over 1 million Republicans that didn't even vote in the last election. So I think that's probably a lost cause. So I think Governor Romney, depending on what he does on the VP selection, which will probably be out here in the next couple of days, I think he probably wins by a field goal.

Operator

The next question comes from Michael Dudas of Sterne Agee.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

I'm still trying to figure out how you've been at this company for 8 years and you still have a mine named Buckeye. So first question is, with the yeoman's work that your team did on the permitting that you went through in the call, how do we look at that relative to helping the operating cost profile of those mines? And is this something that can help in the next 6 to 18 months or is it longer term?

Peter T. Socha

C.K.?

Coy K. Lane

Well, when you look at those, the 2 permits at Triad, Log Creek and Freelandville, helped immediately because we were in need of getting those permits. The Canebrake permit at Hampden helps next year. The Stacy's Branch permit will help end of this year but more so early next year. We'll be probably transitioning to that area, and that's also some better quality that will help blend off some of our underground reserves. And the Wolfpen permit is probably a permit that helps early 2014 area.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

For Peter, any differences in your Midwest accounts versus your Southeast thermal customers in tenor, tone and contracting strategy? And I guess to follow on that, do you think the utilities are more covered for next year than they are -- than they would be otherwise because of deferrals? Or are they just have not, since they've been on a buying strike, they're still pretty open for next year?

Peter T. Socha

Mike, until 3 weeks ago, I would have said yes. We had done some deferrals in the past, and they were very successful. 3 week ago, C.K. and I were out of town at a function, and I talked with several other coal companies why we were there. I was actually struck by the number of people who did buyouts, who had the tons just bought out from underneath them. And that sort of got me to thinking on the way home that maybe the deferred tons were not as big a numbers. I don't know. I mean, this is not -- it's not sure if science is involved in this. The Midwest is different, is very different. Higher sulfur coal, they keep lower inventories, much more impacted by the slower economy, the industrial economy. Southeast is growing faster. All the things that you read about, about the South Atlantic market is doing better. But they keep higher coal inventories, and so they have to work those off. So yes, they're very different in their contracting strategy, and I would say they're different in a lot of different ways. But I was struck by the number of people who said they had done buyouts. And in having this conversation with a couple of people, they were surprised that we had not. So I don't know. I don't know. I guess we'll see probably in February. I don't know. We'll see it in September, October. But I think if it's going to be a more active market next year, we'll know that in late February.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

And that's regardless of you said you had the next month to 6 weeks you're going to have some...

Peter T. Socha

Yes, that's on the met side. That's probably -- that's more on the met side. I mean, in the fall, the fall is traditional -- the fall and spring, late winter, early spring, are traditional contracting season. And I think we'll put some 2013 CAPP thermal tons to bed both near term, both some time in the next several weeks and then also during the fall contracting season. It won't be a heck of a lot. There's not many people buying. I do agree with either Paul or Kevin, whoever said that yesterday. There's not a lot of people buying. But on the other hand, we don't have a lot to sell. We're not moving 30 million tons or 40 million tons. We're moving a few trains here and a few trains there. It's different. It's just different.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

My final question, Peter, is given what you discussed about nat gas and how you might see the market turn out, your observations on what we've seen on the export market year-to-date, do you agree with that we're going to see some slowdown because of netback pricing? And are the gains that we've seen out of the U.S. sustainable?

Peter T. Socha

Well, they're based on prior contracting tons. So what happens, there's not a lot of contracts that are being written out. So when those tons roll off sort of do we hit an air pocket at that time, I would say yes. I mean, just my instinct would tell me yes. But you've got the rail strike going on in Colombia. You've got some other moving pieces here. Let's see what it looks like in September, October.

Operator

The next question comes from Shneur Gershuni of UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

I was wondering if I can continue on some of the questions that Mike was asking. I was wondering if you can talk about coal dispatch from electricity perspective kind of in the second quarter, what you're seeing in the third quarter. And kind of the thought process is there was quoted fuel switching in the first quarter this year. Some of it was fuel switching but some of it was also just due to terrible weather and so forth. Are you seeing sort of a recapturing in market share by coal dispatch in your local regions and so forth?

Peter T. Socha

Well, it's summer. So kind of everything is burning now. So I wouldn't say there's a lot of incremental switching one way or the other because it's been 98 degrees with 90% humidity. I think it will be more important to see what we see in September and in early October. I don't think we saw -- we talked about in the last call in that there was not a lot of room for incremental switching. I think what was going to switch had switched, had already switched. People were calling for it because gas had gotten so low. People were calling for it to continue to increase and increase and increase. Well, it's binary. Once you pass the switch point, you're going to switch. It doesn't matter whether gas is $1.50 or whether it's $2 if your switch point is $2.50.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

So I guess really where I'm going, and I think you sort of answered this, is that now there's a lot of demand out there, essentially there's not -- gas is not able to completely satisfy the power needs, so therefore you are dispatching coal regardless of the price.

Peter T. Socha

Oh, yes. Yes. I mean, you're dispatching coal because of the generation need, without a doubt. Just in talking to the folks I talked to, yes, they're dispatching a lot of coal. We'll see where it is in September. That's quite honestly, that's the time that at least in the South Atlantic utilities, that's when I go see them. That's actually in season [ph].

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Right. And I guess my next follow-up question was related to the seaborne market as well, too. The rails have collected a lot of economic rent over the years and so forth, and I understand the export volumes are strong now because there's contracts backing them. But clearly, there's a contract cliff coming. Have they become a lot more reasonable in the rates that they're charging? Or how they're doing things to sort of make sure that the business continues and so forth?

Peter T. Socha

I think we've been -- I was with one of the rails a couple of weeks ago, and I told everybody from the Chairman and CEO all the way down how pleased we have been to be able to work with them, to meet some contracts, basically, to take some contracts that might not have otherwise been economic and make them economic by working with the railroad. So I think in some cases, the answer is yes. But it's not a broad across-the-board type of thing. It's very selective. It's almost, not quite a one-off basis, but pretty close to it. But I was very -- I was happy to be able to tell, like I said, everybody from the Chairman and CEO, down to the guy that runs the train practically or the guy that prices the trains, that we're very happy to be able to work with them.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

So they essentially understand that if they don't work, this business goes away?

Peter T. Socha

Without a doubt. Without a doubt, they understand that. They get that.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Great. You had some great met coal realizations in contracting this quarter. There's been a lot of talk about discounts in the Atlantic market with respect to different grades and only the top grades are getting and so forth. Can you give us some color on the tons that were actually contracted? Were they in the mid-vol, low-vol grades? Were they even high-vol grades?

Peter T. Socha

All over the map. I was actually looking at it this morning. I was looking at the individual contract list this morning, and it's all over the map both on quality and on pricing. So that's a product mix issue.

Operator

The next question is from Brian Gamble of Simmons & Company.

Brian D. Gamble - Simmons & Company International, Research Division

Peter, I told that cabby if he bashed Obama, you would give him a tip. So that's why he did that.

Peter T. Socha

I was surprised. I was just very surprised at how -- I don't even know how it came up. I don't remember how it came up, but the guy -- and I hate

to use one example as being representative, but he just laid into Obama.

Brian D. Gamble - Simmons & Company International, Research Division

Who is your pick for VP?

Peter T. Socha

Gosh, it's changed. You know what, it's changed. I've always thought that Governor Romney favors governors because he likes people with executive experience. And so I thought that it would be either Pawlenty or McDonnell here in Virginia. McDonnell, obviously, would bring along Virginia big time swing state. But you watch -- obviously, if you watch the body language between Governor Romney and Paul Ryan, they have great body language. I mean, it's clear that they get along really well. So I think it's maybe one of those. I'm not sure on Portman. I think Portman doubles down on sort of all the skill set that Governor Romney brings. But I've just watched a couple of sort of town hall-type things and backyard barbecue things where you have Paul Ryan and you have Governor Romney sitting next to each other, and they really do seem to get along. By the way, on the -- I was going to tell you, on that gas -- natural gas slide, if you take -- you got the forecast from Simmons from last week, we end up at 9.8%. We end up injection season at 9.8%. As you guys show, I think 4.05 TCF.

Brian D. Gamble - Simmons & Company International, Research Division

Okay. So you're coming down a little bit.

Peter T. Socha

You're coming down to 13.5% today between now and mid-November, if you take the Simmons forecast. Between 13.5% today and mid-November, you come down to 9.8%.

Brian D. Gamble - Simmons & Company International, Research Division

It is a slightly more constructive view than we've had in several months, and obviously the weather has had a lot to do with that.

Peter T. Socha

No doubt. But I would say a lot of people talk about the weather and they say gosh, that has really improved this. You look here at this graph at this slide, you've got about 17 data points. Only 3 or 4 of them are weather-related. And the rest, I mean, you go back from March 31 to May 3. There were no weather-related data points in there at all, and the trend line had already rolled over. So you're right, but I think the weather gets a little bit too much credit than maybe it deserves.

Brian D. Gamble - Simmons & Company International, Research Division

No, it does. I think you're still waiting for the roll -- you've seen the roll in the recount, and the recounts there continue to get weak. And as you mentioned, the shifts had been pretty dramatic. But as far as getting the production to roll as well has been something altogether different. So hopefully...

Peter T. Socha

Yes. Anyway, you had questions. I'm sorry I interrupted.

Brian D. Gamble - Simmons & Company International, Research Division

Yes, no big deal. I actually wanted to talk about India, the blackout, obviously pretty significant. You guys deal with India in some of Joe's dealings. A, what do you -- did you get any feel for, on a broad brush, what they made of that at the national level? And does that change their...

Peter T. Socha

I haven't talked to him because, yes, he's been going one direction, I've been going another. So other than a couple of short conversations, I haven't talked to him about India. But I was a little bit surprised by some of the comments in the press from government ministers about the low inventory levels they carry at their power plants. And so it would not surprise me to see some type of government action on that level. We don't ship any thermal to India, at least not yet. I can't imagine we will any time soon. But I think that, that will benefit Richards Bay and I think that will benefit Colombia.

Brian D. Gamble - Simmons & Company International, Research Division

Okay. You don't think they...

Peter T. Socha

[indiscernible] Yes, I mean, you got Chris Cline stuff in the Illinois Basin that will certainly help them. We'll get a knock on benefit, but I don't know how much we would get a direct benefit.

Brian D. Gamble - Simmons & Company International, Research Division

Okay. And then the permits that you guys received during the quarter, kudos for that. Is that something that opened -- I'm assuming it wasn't just for you. But did -- I mean, are there other permits of that nature that are being passed through? And why the sudden change of getting 5 in a quarter?

Peter T. Socha

C.K.?

Coy K. Lane

I'm not sure about what all the other companies are doing, but the timing worked out where we ended up getting the 5 permits. Most of these have been worked on for a minimum of 2 years up to 5-plus years. So the timing of them in the quarter was very fortunate for us, but these are long-term permit processes. They're not short term. And so just lucked out that they all came when we were able to announce them this quarter.

Operator

The next question is from Lucas Pipes of Brean Murray, Carret.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

What you said about the natural gas market was particularly intriguing and I wondered if given kind of the bullish -- more bullish outlook there on the thermal coal market, how does the thermal coal inventory side play into your outlook considering that?

Peter T. Socha

Still big. I mean there's still, at least in our neighborhood in the Southeast, there's still a lot of coal on the ground and that will take some time to work off. I think the biggest issue I had was how much had been deferred versus how much had been bought out. And if it's been deferred, then that means they can just accelerate the shipment, no big deal. But the fact that it had been bought out means the utilities, if it's true, then the utilities would come back to market sooner. But there's still a lot of coal on the ground. It's still -- I'll go back to what I said in May, which is I think it's going to take 2 normal seasons for the Eastern coal markets to recover. I think PRB is clearly recovering now, but it's going to take 2 normal -- a normal summer followed by a normal winter.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

And we had a few questions on kind of your contracting strategy on the back of that. So you're layering in some contracts right now and then for the remaining tons, when do you think is an appropriate time to go-to-market for that?

Peter T. Socha

Well I mean, we'll do some in the fall. As I said earlier, I forget who I was talking to, but as I said earlier, normal contracting season for us with our customers in the Southeast is sort of from mid-September through late October. And then again, from mid-February through mid-March. So I think this coming contracting season, we should be able to put some things to bed. It's going to be small. It won't be very great. But when you look at it, you're going to say -- when you get the Q3 report, I guess, and it has in it contracted position, you look at it and say gosh, they're really uncontracted for -- open for 2013. I may look at it and say I'm sold out for Q1, and that's all I care about is that I'm sold out for Q1. So it's a little bit different perspective. So my goal right now and the goal of our sales guys on the thermal side is contract up January 1 -- I mean, contract up the month of January, contract up the first quarter, contract up the first half. If the market continues to tighten the way that we see, then why would I want to contract now sort of full year -- either full year or 2 years, say, 2013 and 2014? That makes no sense.

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

That's very helpful. And then maybe lastly on the cost side, some of your peers have also reported nice cost improvements Q2 versus Q1 working with vendors and such. And I wondered if you could comment on what you're seeing and how much -- how many levers you have left to push there.

Peter T. Socha

Well, I think we've got -- well, actually C.K., why don't you take that?

Coy K. Lane

Well, we continue to look at how we're operating our mines, and we have idled some of our higher cost mines like other folks have done. As far as working with vendors, most have been very good to work with. We're seeing reductions across the board in a lot of areas. Some vendors were still seeing some increases on new equipment. So for the most part, they've been working pretty well with us, and we've been looking at a lot of different alternatives and just about anything we can look at to help improve our costs.

Operator

The next question comes from Chris Haberlin of Davenport & Company.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Most of my questions have been asked here. Just a couple. On the cost side, just given the pullback that we saw in oil prices during the second quarter, have you all layered in any hedges for diesel prices?

Peter T. Socha

We haven't done any hedging at all other than through the contracts in the Midwest. We haven't really put the hedging program in place. I expect we will some time later this year, early next year. But we haven't put in place a hedging program, a formal hedging program.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay. And then thinking about your contracting strategy, kind of taking it month and quarter and first half, how would you -- I guess, would you feel comfortable going into the first quarter not fully contracted? Or would you expect to be fully contracted as you...

Peter T. Socha

Not fully contracted for the quarter?

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Yes, not fully contracted.

Peter T. Socha

We have done that in the past. Actually, if Mark's here, he can walk over and bang on my door. We have done that in the past where we had some open ton let's say March. We went into the year and we sold out some more tons for March, for instance. C.K., didn't we do that 3 years ago, 4 years ago?

Coy K. Lane

Yes, 3 or 4 years ago.

Peter T. Socha

So it's not ideal. It's not something we want to do, but it's also not something we haven't done before.

J. Christopher Haberlin - Davenport & Company, LLC, Research Division

Okay. And then last, just a housekeeping question, maybe for Sam. Does the D&A guidance for March 1 implies a step up in D&A in the second half and...

Peter T. Socha

That's a modeling question, Chris. You know better than that. Call Sam after the call.

Operator

The next question comes from David Beard of Iberia.

David E. Beard - Iberia Capital Partners, Research Division

Just wanted to get a little more color on the question I asked last quarter relative to production shut-in to being more permanent. Do you still feel that way? Or do you have any additional thoughts?

Peter T. Socha

You mean across the industry, say across [indiscernible]?

David E. Beard - Iberia Capital Partners, Research Division

Yes.

Peter T. Socha

C.K.?

Coy K. Lane

I think as you see, and I think Alpha made a comment on the call, a lot of the mines that are being shut-in now will be difficult to restart with the new MSHA regulations and all the guidelines that keep coming out and new regulations from MSHA, just the items that we have to purchase and everything. And even now, to maintain an idle mine is very expensive. So I think certainly, some of those mines will come back. If you have a 2-section coal mine and you shut 1 section down, that's much more easy to bring that section back because the mine is still active. If you got a single section mine that's fairly deep underground and you idle it, I think it'll be very difficult to some of that. So I would say quite a bit of the production that will be more difficult to bring back.

Operator

At this time, I'd like to turn the conference back to you, Mr. Peter Socha.

Peter T. Socha

Okay. Thanks, Janine. Thanks for all your help. Thank you, everybody. I know there's some other questioners out there. Please feel free to call Beth. I've got to go out. I'll be out this afternoon. We will be back on the road this fall. So hopefully, look at the schedule or call Beth and get something worked out and we'll get to you. Everyone, have a good day.

Operator

Thank you. Ladies and gentlemen, this does conclude the program. You may all disconnect, and everyone, have a great day. Thank you.

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